The IRS revisited the issue of pension plan overpayments with its guidance in Revenue Procedure 2015-27 because there was confusion as to whether plans had to try to recoup payments from employees under all circumstances, or if other options could be explored, an agency official said during a webcast.
The Internal Revenue Service's Employee Plans Compliance Resolution System previously offered other options for correcting overpayments, “such as possibly correction by plan amendment or the employer compensating the plan, provided certain conditions are met,” but that wasn't made clear, Avaneesh Bhagat, manager with the IRS's Voluntary Compliance Group, Office of Employee Plans in El Monte, Calif., said Aug. 19.
Because of that lack of clarity, Rev. Proc. 2015-27 reiterates that “there could be circumstances where recoupments from employees may not be a practical methodology for correction,” and in those cases, other options can be explored, provided that other correction principles aren't violated, he said.
For example, “if you're going to correct by plan amendment, you want to make sure the amendment does not have the effect of violating some other qualification rules, such as the non-discrimination rules under 401(a)(4),” Bhagat said.
The other piece of guidance the IRS issued that modified the EPCRS was Rev. Proc. 2015-28, which includes a new safe harbor for correcting automatic contribution failures.
Bhagat said the IRS felt the need to make that change because once plans with automatic enrollment features became popular, Rev. Proc. 2013-12 came under fire for its expensive required correction.
The IRS heard from many plans that the “approach where we always required that 50 percent correction for missed deferrals, regardless of type of plan or period involved, could be an expensive proposition, especially for plans that require automatic enrollment, because in an automatic enrollment plan, you have to implement deferrals on behalf of people who otherwise did nothing,” he said.
In addition to issues with automatic enrollment, plans with automatic contribution escalation features are also prone to errors because there can be difficulty implementing those provisions in a timely manner, he said.
“The feeling was, in the absence of the relief provided for in the new revenue procedure, we would be unwittingly discouraging auto-enrollment type plans. That's something that we obviously don't want to do. So this revenue procedure makes an effort to address that,” Bhagat said.
New Way of Changing EPCRS
When the IRS made changes to the EPCRS earlier this year, it was the first time the agency modified the program with supplemental guidance instead of a restated revenue procedure, Pamela D. Perdue, of counsel with Summers Compton Wells LLC in St. Louis, said in the webcast.
In issuing Rev. Procs. 2015-27 and 2015-28, the IRS has given more flexibility for correcting overpayments from defined benefit plans and new safe harbors for correcting automatic enrollment failures under 401(k) and 403(b) plans, she said.
“Now when we sit down to look at proposed, or optional correction methods for our clients, we've got to do so both with the basic guidance housed under Rev. Proc. 2013-12 and now with the additional guidance of 2015-27 and 2015-28,” she said.
Rev. Proc. 2013-12 was a major update of the system issued in December 2012.
Perdue and Bhagat spoke during a webcast called EPCRS Update: Recent Guidance for Correcting Plan Defects, sponsored by the American Law Institute Continuing Legal Education.
Excerpted from a story that ran in Pension & Benefits Daily (08/20/2015).
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